Financial institutions have been the leading investors in identity management for decades. The ability to verify that customers and employees are who they claim to be, is fundamental to security and trust.

In recent years, disruptive innovation has transformed the nature of financial interaction. As services are rapidly digitised, financial providers need new tools to determine identity and prevent fraud.

Biometrics, mobile document capture, security tokens, and two-factor authentication are all now key to how we access banking and payment services online. As consumers, being confronted with a new method for verifying our identity has become a regular occurrence.

But while we are seeing a lot of change, it can feel as though we’re not seeing much progress. At least not coordinated progress.

Most of us still have stacks of passwords and security codes to keep track of. And we are still met with different identity barriers each time we access an online service. Yet fraudsters continue to find new ways to make it past these barriers.

Why the delay?

The right technology is out there. Challenger banks – unencumbered by legacy and targeting a tech-savvy demographic – have demonstrated as much, delivering end-to-end digital identity at impressive speed. Incumbent banks, meanwhile, despite years of historical customer data and experience in KYC, have shown caution in adopting digital identity at scale.

When you consider the business risks and opportunities, this is perhaps unsurprising. A major security or regulatory breach could cause far greater damage to a bank’s reputation than a hesitant approach to innovation.

And like any form of transformation, digital identity requires significant investment in the right resources and expertise. Predicting the return on this investment with enough accuracy to justify it, can be tricky.

New incentives for change

As we enter 2022, the financial sector has the hindsight of two years spent tackling a global pandemic. National lockdowns made relying on face-to-face identification extremely challenging, while work from home orders put operational pressure onto fraud management teams.

Fraud losses reached new highs. Financial aid for businesses and individuals impacted by the pandemic, provided new fuel for phishing and impersonations scams. And according to UK Finance, internet banking fraud in the UK increased by 117% in 2020, and mobile banking fraud by 78%. Suddenly the impact of not having a secure digital identity infrastructure, was brought into sharp focus.

Alongside a rise in cyberattacks, financial institutions witnessed an increase in legitimate use of digital services, across all customer demographics. Expectations emerging pre-pandemic were firmly cemented. Now, following two years of working, learning, shopping, accessing healthcare and so much more online, the idea of having to go to a bank branch to complete an in-person verification, seems more inconvenient than ever.

Attitudes have shifted from viewing digital identity as a ‘nice to have’ investment, to a fundamental requirement for any business operating in the digital economy. The question now, is what role will banks take in building a global digital identity ecosystem?

Will banks become identity custodians?

In Scandinavia, Bank ID – an e-ID administered by an alliance of local banks – is now used by 94% of smartphone users. Under the scheme, banks enable their customers to authenticate themselves for access to a whole range of public and private sector services.

Looking to the future, banks everywhere could open up new revenue streams by taking on this role as the ‘custodians’ of digital identity. Core strengths in KYC and data protection would be put to good use, and the threat of disintermediation reduced – just as we saw with the building of global rails, for card and digital payments.

At the Future Identity festival last November, we heard exactly this from Rod Boothby, Global Head of Identity at Santander, and one of the 150 authors of the GAIN paper. GAIN calls on banks to take a leading role in digital identity, and vouch for their customers when they purchase goods, open accounts, access services and sign documents online.

The initiative’s aim is to unite disparate identity schemes across the global digital economy. The level of interoperability required to enable this shift would certainly be challenging. But fears are growing that if financial institutions fail to take on this role, Big Tech will fill the gap.

The road ahead

As the world emerges from the worst phase of the pandemic, there exists a significant opportunity for banks, fintechs, technology enablers, and policymakers to collaborate on identity.

Digital identity will undoubtedly have a key role to play in the future online economy. That much is certain. The ability to verify identity digitally, is simply no longer a choice for banks. To keep up with new regulation, increasing fraud and evolving expectations, digital identity has become a necessity.

The challenge is in building an identity ecosystem which is interoperable, inclusive, trusted, and keeps the needs of the end user at it’s heart. Banks could be integral to piecing this puzzle together, if they embrace digital identity as a priority, in 2022 and beyond.

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Look out for the upcoming launch of Future Identity finance, taking place 28th April, in London.